Many people find major unexpected car, home or health related expenses a serious blow to their already tight budget. The best way to maintain control in these instances is to have an emergency fund, or what I like to think of as a ‘life happens’ reserve.
Nothing can wreak havoc on your nerves more than not having funds on hand when a ‘life happens’ situation arises. An emergency fund is much more than another form of saving. It’s a sign of smart money management – the ability to control your finances with the goal of accumulating wealth.
While other options are available, they come with additional costs, which may or may not be financial. Let’s examine some of those options.
Borrowing from friends or family can be the ideal situation, if you are so fortunate. When you choose this solution, create an oral or written agreement that clearly outlines how and when you will repay the money. Then you must be intentional about meeting your repayment obligation as promised. Nothing can ruin a relationship faster than not repaying a loan when you say you will. 😡 I’ve witnessed this situation more times than I care to mention. And although lenders are advised to consider a loan a gift, failing to repay borrowed funds will cause resentment.
The time my father loaned me a substantial amount of money felt like a tremendous burden. Although we never discussed it, the obligation weighed heavy on my mind. I can’t describe the relief I felt when I repaid him a lump sum three years later. Though not part of the deal, I added interest to make up for what he lost by not having those funds available to invest. 👍
Overdraft fees is one way banks make money. The standard amount of an overdraft fee is $35. While your bank does not charge interest on overdrafts, every time you pay an additional expense using your checking account while it is in the red, you accrue an additional $35 fee. The amount of the expense does not matter. It can be $100 or $5. You will still accrue another $35 overdraft fee. 😥 As you can see, these fees accumulate substantially if not quickly addressed. More on this shortly.
Beginning in June, banks in the United States will be required to reduce overdraft fees to $8. While not $35, the amount of money spent on accrued fees would certainly benefit you more if in your pocket instead of the bank’s.
Payday loans are downright robbery. They are short-term loans expected to be paid off by your next paycheck. Payday loans are accessible to anyone but be warned: if you cannot meet this obligation, you will incur outrageous interest fees. My normal advice is to avoid payday loans at all costs. But like most advice, there are exceptions.
One client who took advantage of my financial coaching services couldn’t understand why she earned more than she spent every month, yet her checking account stayed in the red. I asked her to send me a copy of her bank statement and I quickly noticed a high number of $35 overdraft fees. She didn’t realize how this option works. Because she had no other alternative, I suggested a payday loan, which she could easily cover with her next paycheck. She got her head above water by eliminating these ongoing fees.
Other resources include bank loans and credit cards. If not already set up, both take time to establish and include interest rates with penalties when you don’t make payments on time. 💣 The effect late payments can have on your credit rating is another conversation.
Other than possibly borrowing from a family member, the rest of the options mentioned above have the potential to include attached fees. Addressing unexpected expenses with an emergency fund allows you to eliminate further punishing your hard-earned income. The ability to place money you would have otherwise paid in interest and penalties into savings or investment vehicles is a smart money move that increases your financial wealth.
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